Leibowitz on Trade: Now that the Shutdown's Over...

As a trade person, I naturally focus on that issue. You do not have to look far to find issues in the trade area that divide us. Today, in response to a good friend’s question, I explore the steel tariffs and the growing pressures that urge changes in that policy.

There are many businesses with an interest in changing the tariffs, receiving product exclusions, excluding countries from trade restrictions and reforming laws such as Section 232 (trade restrictions for national security reasons). Herewith a brief summary of the current state of those efforts and where they might be going in the near term.

Overriding everything is the end of the shutdown, and the possible renewal of a shutdown by Feb. 15. The president agreed to end the shutdown this past Friday; there are three weeks to negotiate an immigration plan on which both the president and Democrats in the House of Representatives can agree. Otherwise, there could be another lapse in funding. The consensus so far is that the president came out of the shutdown crisis weaker than he went in. Republican support, especially in the Senate, began to evaporate. There is now talk of a possible primary challenger for the Republican nomination in 2020. Let’s see how all this impacts the trade issues that are front and center now:

The U.S.-Mexico-Canada Agreement—USMCA is the revised trade agreement among the United States, Canada and Mexico that would replace NAFTA. Increasing numbers of American companies, no doubt spurred on by their suppliers and customers in the NAFTA region and elsewhere, are urging the administration to terminate the steel and aluminum tariffs on Canada and Mexico. This past week, 46 associations in commerce, manufacturing and agriculture sent a joint letter to the Secretary of Commerce and the U.S. Trade Representative noting that the harm caused by the tariffs far outweighs the benefits of the new agreement. 

Outlook—Gloomy. The congressional consideration of the USMCA will begin in earnest shortly. Major Democrats that were courted by the Trump administration have already turned against the new agreement, claiming that it does not do nearly enough for labor rights. Canada and Mexico are not likely to support the kind of major renegotiation that such changes would require. At this point, the prospects for congressional passage, which were at best uncertain before the shutdown, are dim.

The Section 232 Tariffs—Dueling bills are about to be introduced in Congress. One, by Rep. Duffy (R-Wis.), would give the president even more authority to raise tariffs than he already possesses. The other, spearheaded by Senators Toomey (R-Pa.) and Warner (D-Va.) would terminate the authority of the president to impose trade restrictions on national security grounds without specific congressional approval. The legislation would apply the new rules to any Section 232 remedies imposed in the previous four years, so the steel and aluminum tariffs would go away.

Outlook—Uncertain at present. Both the bill to increase the president’s discretionary authority and to restrict it face tough sledding. The prospect of additional reforms of the product exclusion process is better. The president’s political strength took a jolt when the shutdown ended as it did. Can he recover? Again, we must wait and see.

Section 232 Product Exclusions—The Senate Committee on Homeland Security, chaired by Sen. Ron Johnson (R-Wis.) will resume shortly its investigation of the Section 232 product exclusion process. Again, Sen. Toomey has written on this and is hearing from a lot of constituents about shortcomings in the product exclusion process. As the chief officer responsible for product exclusions under the Section 232 tariffs, Secretary Ross will face questioning during the coming months. The first hearing has already been scheduled before the House Committee on Government Operations and Oversight, chaired by Maryland Democrat Elijah Cummings. The hearing will be about more than Section 232 tariffs—Secretary Ross faces litigation about the inclusion of a citizenship question on the 2020 census form, as well.

Outlook—Uncertain. Secretary Ross will be under fire over the Census questions, as well as the steel and aluminum tariffs. Now that the shutdown is over, I expect new activity on the product exclusions. We will see if any major changes in direction are forthcoming.

China Tariffs—On Dec. 2, President Trump and Chinese President Xi Xinping announced a 90-day “truce” in the trade war between the two countries. The truce expires on March 2, 2019. There was one negotiating session in China early in January, at the “sub-ministerial” level. The upcoming session this week in Washington will be headed by Chinese Vice Premier Liu He and U.S. Treasury Secretary Steven Mnuchin. According to news sources, this may be the last chance for a high-level meeting before the March 2 deadline.

Outlook—Cloudy to gloomy. There is little evidence of real progress in these talks, although pressure in different areas (e.g., the arrest of Huawei’s CFO in Canada, the indictment of several companies and executives for industrial espionage) have strengthened the U.S. position. Fundamentally, a trade conflict, as damaging as it may be to U.S. interests, especially agriculture (through retaliatory tariffs) and manufacturing (retaliation and input costs) will be more damaging to the Chinese economy. Having come out of 2018 with a growth rate of about 6.5 percent, the lowest in 10 years, and a stock market hemorrhage of 25 percent in their stock market, China could use a respite in the trade conflict. However, China’s ability to do more than make small concessions is doubtful. There is a fair chance that the next step in the trade war, the increase of tariffs on $200 billion worth of imports from China from 10 to 25 percent, will happen in March.

Lewis Leibowitz

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